What Can We Learn from Kevin Warsh's First Fed Meeting?

Dana Peterson: Welcome to C-Suite Perspectives, a signature series by The Conference Board. I'm Dana Peterson, chief economist and leader of the Economy, Strategy & Finance Center at The Conference Board. And I'm also the guest host for today's episode. Today, we'll discuss the new Fed chairman, Kevin Warsh, and the outcome of his first press conference this past Wednesday.

Joining me is Yelena Shulyatyeva, senior US economist at The Conference Board. Welcome, Yelena. Yelena Shulyatyeva: Thank you, Dana. Dana Peterson: So it's so great to have you here.

Yeah, big things happened yesterday. Yelena Shulyatyeva: So much to talk about. Dana Peterson: Yeah. So let's start with just the big picture.

What's the biggest takeaway from Warsh's first FOMC meeting, and especially the hawkish tilt and his discussions about institutional reforms? Yelena Shulyatyeva: I think there was a surprise in the meeting, and there was also something that was widely expected. So it was kind of both, right? So the biggest surprise to me was how hawkish some of the communication was, like thinking about the dot plot.

Nine out of 18 dots that were submitted wanted a rate hike of some sort, right? So that was kind of a hawkish tilt. But at the same time, we got a whole host of discussions about the reforms that the new chair would like to see on the Federal Reserve. So that was expected, but probably the scale of the expected reforms was also a surprise.

Dana Peterson: Yes. They seem quite sizable. So how different could the Warsh Fed look compared to Powell or even the last few Fed chairs, even going back to Greenspan? Yelena Shulyatyeva: Yeah.

Watching the press conference yesterday really was a throwback to the time when young Yelena started on Wall Street, and she was listening and trying to understand what senior colleagues were discussing at the end of the Greenspan era and going into the Bernanke era, and what implications for the market that would bring. Yeah, stepping back, you really need to consider how policy changed from Greenspan to Bernanke to Yellen to Powell and now to Kevin Warsh. I think that each Fed chair had their own challenges.

They all had a Congress-directed dual mandate of maximum employment and price stability. But at the same time, again, they had different challenges, different crises that they had to handle. So Greenspan thought about it as markets know best, right? Bernanke came, and uh, his goal was to save the system no matter what, particularly at the time of the global financial crisis.

Chair Yellen put a lot of emphasis on employment. And Chair Powell was addressing a lot of his own crises, particularly during the COVID era. Now, with Chair Warsh, I think the focus is on going back to more market-oriented Fed, back to classical kind of Fed goal. Less communication and, I think, a lot of reform Dana Peterson: Yes, lots.

And, and I think markets, as well as businesses and consumers? Are going to need to adjust to this. So you mentioned communication. So he's looking at an overhaul, and he has created these five task forces.

And indeed, you named your reaction to yesterday to the FOMC statement, "We've got a task force for that." That takes me back to when Apple had, you know, "We have an app for that." So Warsh interestingly did not submit a dot in the summary of economic projections, and the dot plot is basically projections of about 18, 19 people of where they think the federal funds rate should be in each year. And he didn't vote, and he also didn't use any forward guidance.

He took that out from the statement. So we don't know. We were thinking that the Fed would just strip out one word. I think it was "additional."

Yelena Shulyatyeva: Additional, yeah. To eliminate easing bias. Dana Peterson: But the entire policy statement was different. It was shorter.

It gave less information, but there was this promise about price stability. So just going back to the dot plot, is this the beginning of the end of the dot plot? Yelena Shulyatyeva: I think so. I think we will see probably the elimination of the summary of economic projections and the dot plot.

It's up to the task force obviously, but I think we are tilting into that direction. We could also potentially see fewer press conferences. So there were a lot of questions about that during the press conference, at this first meeting. But obviously, he had a lot to say.

But Chair Warsh said that we will have a press conference when we have something to say. Which means that probably if they just don't, then they will skip a meeting. So I think we will see fewer press conferences because of that. Dana Peterson: Makes sense given what was transmitted yesterday.

So the FOMC was evenly split between hikes and no hikes, once you take out Warsh's no vote. What is our forecast, so TCB's view of policy rates into the future? Yelena Shulyatyeva: So we think that the Fed will not hike or cut in the near future. So we just left the forecast unchanged following the FOMC meeting and the press conference, and the reason is, it's just so much uncertainty.

It's so much uncertainty about how the ongoing crisis in the Middle East, regardless of the pending agreement, how that will trickle through the economy. It could still trickle much further into prices and eliminate some of the consumer demand for certain goods and services. So we still don't know the full impact of that on the US economy. There are other external forces driving what is going on in the US economy.

So I think that we're going to stick to that forecast for now. Yes, the communication was definitely in a much more hawkish direction, so the dot plot, the stressing of the inflation mandate in the statement, and also, they revised inflation forecast quite substantially. That is all in a hawkish direction. But at the same time, the statement mentioned supply side shocks, right?

Hinting at the temporary nature of these forces. And by the way, they left the year's forecasts for inflation relatively unchanged, and they are quite close to 2% inflation target. So all of that is kind of saying the word "transitory" without saying that, and that by itself may mean that the Fed will just not need to act in the near term. So, sticking with the status quo on interest rates for now.

Dana Peterson: OK. So 2026, TCB has no actions, no hikes, no cuts. Yelena Shulyatyeva: Correct. Dana Peterson: OK.

What do you think about 2027 and 2028? What were they seeing? I mean, was there a consensus in terms of where at the FOMC thought rates should go in those next two years? Yelena Shulyatyeva: The dots are lower from what they see in 2026.

So there was, again, nine people on the FOMC saw rates going higher in 2026, but then kind of reversing back to a lower level. So I think it's very premature at this point to even think about what happens in 2027, 2028, again, because of so much uncertainty. And the Fed didn't give us any help, how to think about it even, right? Dana Peterson: guidance.

Yelena Shulyatyeva: OK, fine. No forward guidance is one thing, right? Just, OK, don't tell me what your commitment is for the future, but at least explain it to me how did you come up to this decision today? Dana Peterson: But that's the opacity that he wants to kind of restore because he believes there's just a lot of noise.

Yelena Shulyatyeva: I think it's a dangerous thing, though, because this flexibility in terms of what you could do next comes at a price, and the price is that the markets will want to see higher return for all this uncertainty, right? So eventually, that could actually mean high interest rates. So there is a price for everything, and creating this vague uncertainty, or whatever you want to call it, about any explanation of why you did this at a particular meeting is probably not a good thing.

Dana Peterson: Yeah. There's just going to be more speculation and wild theories. And the question is, well, we saw in the prior fed administrations that they would kind of tackle and address the wild accusations and the suppositions to just have a clear message. So do you get the sense that if markets start hallucinating kind of thing, making up their own narratives, and it's becoming disruptive, do you think that the Fed, and indeed, Chair Warsh, will step in and say, "OK, well, that's just not correct," or that's not what we're thinking, and that's not what we want to happen?

Or do you think it's still going to be kind of shrouded in - Yelena Shulyatyeva: There's a task force for that. Dana Peterson: There you go. There's the answer. Yelena Shulyatyeva: So, I really don't know, and that's the answer.

We will hear from at least two regional Fed presidents next week. All this vagueness doesn't mean that Fed participants will not speak. They will. And it's actually regional Fed presidents' task to explain to their regions, to their regional boards and people in their regions, why policy is such or such, right?

So, and I hope we will hear from them, and we will get a little bit more clarity. Dana Peterson: Absolutely. We're going to take a short break and be right back with more of my conversation with Yelena Shulyatyeva on Chair Kevin Warsh. Welcome back to C-Suite Perspectives.

Again, I'm your host, Dana Peterson, chief economist at The Conference Board, and also the leader of the Economy, Strategy & Finance Center. And I'm bringing back Yelena Shulyatyeva, who is our senior US economist at The Conference Board. So let's just dive back into the questions. Now, Warsh said that he's creating these five task forces to basically review, analyze, and come up with suggestions for almost every aspect of what the Federal Reserve System does.

So I'm going to go through these different task forces, and I'd love to hear from you what he said, and then what could be some of the implications for businesses, as well as markets and consumers. So again, the inflation framework review, that's the first task force. We talked about communication framework changes. What aspects of the current inflation framework could be on the chopping block?

Yelena Shulyatyeva: So it could include a lot of things. So how the Fed balances inflation versus the employment objective, what the Fed does when inflation overshoots, how they communicate the inflation target. Well, at least we know that for now, 2% inflation target stays, right? But what else do you think could be changed?

Inflation is such an important objective here, but at the same time, we didn't hear much about the other part of the mandate. So what do you make out of it? Dana Peterson: There, before he was confirmed, he did make suggestions that perhaps we should go back to an earlier state, and you wrote about this in your paper, of how the Fed should look at inflation and be either anticipatory or data-dependent or waiting for balance, waiting for both mandates. Yelena Shulyatyeva: They did reiterate the dual mandate in the statement.

Dana Peterson: They did. Yelena Shulyatyeva: So, we did get that reassurance. Dana Peterson: But we also got the guarantee of price stability. And even during the press conference when Warsh was asked about something related to the labor market, it was a very short comment.

So I think this is going to go back to, in some sense, the Greenspan days less communication, let's just put it that way. But also, I would say go back even further to mainly focusing on inflation, and that actually goes back to 1950s, 1960s, before that. Yelena Shulyatyeva: Or other central banks. Dana Peterson: And other central banks who don't have a dual mandate.

So that's going to be really interesting to see if this inflation framework is going to take precedence over and ultimately supplant this kind of dual mandate. I guess I want to ask a couple of questions about inflation gauges. So there are lots of inflation gauges, and one thing Chair Warsh talked about was data. And most of the time, the Fed pays attention to the PCE deflator headline.

And they also take a look at the core to see underlying movements. But do you think there's going to be more types of inflation considered in the policy? So things like trimmed mean and - Yelena Shulyatyeva: Well, he clearly mentioned the trimmed mean measures of inflation. I think it's probably broader than that.

I think that Chair Warsh is questioning the validity of data like, at large, and whether traditional economic indicators adequately reflect what is going on. So I mean, there's some sense in it because we probably do need a comprehensive review of the data that we're using, especially in the new age of all the AI and other things. So think about how we measure housing prices, right? So it's a very indirect way of doing it, and at the same time, we do have some real market data on this.

Dana Peterson: Absolutely. Yelena Shulyatyeva: Or think about, I don't know, PCE, inflation measures you mentioned. 13% of PCE index is imputed prices, so there is like an estimate of some sort of what the prices were, and it's not a direct observation. There's definitely some room for improvement there.

Dana Peterson: Absolutely. Yelena Shulyatyeva: The question is, what is the cost, and how you resolve it? Yeah, we're all for better data and better use of sources and wider use of sources, but how do you approach that? And it's not an easy solution.

Dana Peterson: It isn't. And you're also going to need the cooperation of the private sector. Lots of corporations have granular data. Lots of industries, but they're reluctant to share it because of course, there's competitive intelligence in that, and they don't want to tip off their competitors.

But also there's a concern about what it's going to be used for, the privacy of their customers, and all these kinds of things. So Warsh seemed to be supporting including more measures, including private sector measures, higher frequency measures. But again, it's, can we trust all of it? Is it all rigorously done the way BLS and the BEA produce data?

So those are going to be questions that have to be answered. And so would you say that AI and private sector data will become more important input into monetary policy decisions? Yelena Shulyatyeva: I think so. I think so.

There's definitely some movement in that direction. And at least there will be a comprehensive review of the data, which is, I think it's a positive thing. We all agree on that. But again, it goes back to the costs.

Why the government data may not be reflecting the recent developments. Well, because there's a cost to everything, right? So there's like the lack of financing and all of these different issues, challenges that statistical agencies are facing. Dana Peterson: Yeah.

So maybe Warsh can turn the tide and get more money into better data. Yelena Shulyatyeva: Better data is all we are for. Dana Peterson: Yes, and I rally for that. Let's talk about the balance sheet.

Use of the balance sheet is an unconventional tool, and certainly adding private assets, as well as government assets, to the Federal Reserve's balance sheet was unprecedented. But that was done, it was called quantitative easing at the start of the Great Financial Crisis, and it was repeated. We had several rounds, different types of things. We had Operation Twist before that.

And then we also, the Fed also used quantitative easing when the pandemic struck. It was kind of like, everyone was like, "OK, we experienced a 10-year financial crisis. We're going to go all in to get us back out. No experimentation."

And then once that passed, the Fed started dialing down the size of the balance sheet. But it seemed like, they're pretty much done, as of Powell's last meeting. But Chair Warsh has expressed concerns about the balance sheet. Is it still too large?

Because the goal was to manipulate markets, particularly the bond market, and also to rescue the asset base, like housing. But mainly the bond market, to depress the back end of the yield curve. And so with quantitative tightening, as it's colloquially called, or reducing the size of the balance sheet, that actually takes some of the weight off of the yield curve. So yield curves did rise due to QT.

And it wasn't just Fed cuts. It was both of those things. They were taking their foot off. But there's also fiscal policy.

But he thinks that even at this level, it's probably too much. It's still distortionary. You know, there are a lot of concerns about the balance sheet expressed by Warsh and many other Fed observers. So do you think that there's going to be greater emphasis on the side of the balance sheet and also uses of the balance sheet in terms of price easing?

Yelena Shulyatyeva: I think any changes with respect to the balance sheet will be gradual. So let me put it right there. The statement reaffirmed an ample reserve regime, as well, so that's a very important thing, as well, because it just leaves things where they are as of now. Dana Peterson: Kind of puts a floor on how low you want to take the balance sheet.

Yelena Shulyatyeva: But I think that the task force will take a look at the size, the composition, the duration of the balance sheet, every single aspect of that. And this is definitely worth watching what they come up with at the end of the year. Let me just tell you something. So when the crisis hit, right?

Go back to the COVID crisis. It required a concerted action from all kinds of different authorities, fiscal, health care, monetary authority, to conquer the crisis, right? To stop the spreading of the crisis into the markets and all kinds of different things that could have happened. I would be really surprised if, in case of a different crisis, and obviously, we don't wish for one.

But if something happens, I would be very surprised if we don't see the repetition of that. So it works. It requires all kinds of different things, and the balance sheet is a tool in the Fed toolkit that could be effectively used to do that. So it's just a matter of what it looks like during normal times and in the time of the crisis.

Dana Peterson: What's normal? Yelena Shulyatyeva: Yeah. Dana Peterson: But one thing you did say you have been writing about the balance sheet is that any changes are going to be evolutionary, rather than revolutionary. Yelena Shulyatyeva: And I stick to that.

Dana Peterson: Great. So if you fast-forward to the end of this year, which of the five task forces is most likely to produce a recommendation that will materially change the Fed's operations? Yelena Shulyatyeva: I think we heard it loud and clear at the press conference that Chair Warsh really wants to leave a significant footprint in terms of changing how the Fed operates. He wanted to establish himself as a reformer, and I think we will see significant changes with respect to every single aspect of how the Fed operates.

It's real, and I think we are into finding a lot of interesting details at the year-end. Dana Peterson: Yeah, so you should be very busy with answering everybody's questions. Yelena Shulyatyeva: We all will be very busy. Dana Peterson: For our members and the public on deciphering what the Fed's going to look like going forward.

So the last question is, five years from now, we look back to Chair Warsh's tenure what will be the defining legacy? Will it be higher interest rates or lower interest rates, different types of communications, or just a fundamentally different policy framework? Yelena Shulyatyeva: I hope the dual mandate stays the same, and the Fed pays equal attention to the both sides, right, maximum employment and price stability. I think we will see a lot of reform in terms of communication, and we'll have to get used to how the Fed operates in a new regime.

But after all, I think the Fed will be there, and it will be the lender of last resort if needed, and I think that will not change. Dana Peterson: Excellent. That was a great conversation, Yelena. Yelena Shulyatyeva: Thank you so much, Dana.

Dana Peterson: And thanks to all of you for listening to C-Suite Perspectives. Again, I'm Dana Peterson, and this series has been brought to you by The Conference Board.